“Behaviours change slowly. Time is often the most important investment you can make. It’s going to take more than one try to make an impact and it will take more than one success to make a difference.”
This is one of the social impact principles that we, at the Michael & Susan Dell Foundation, use to guide us in our work. Since 2006, we have been working towards transforming large-scale school systems to improve access to high-quality education and create pathways to successful livelihoods by enabling responsible financial services for Indian families living in poverty. The objective has been to bring about systemic change while imparting measurable impact to children and families across the regions we work in.
To this end, we have committed over $200 million across more than 100 grants and over 40 impact investments including seed funds, debt, equity and guarantees. We have fully returned our first cohort of investments and are well into exiting the second. We have successfully nurtured our portfolio to achieve impact at scale by attracting substantially larger follow-on capital and achieving reasonable profitability. Most significantly, we have managed to impact the lives of over 12 million families living in poverty in urban India.
Along this journey, we learned a great deal about the complexities of the impact investing space, and as we inch closer to the $100 million mark in impact investments, it is the perfect time to reflect upon the lessons. Below are some of our key guiding principles:
1. Identifying white spaces.
At the foundation, we are always looking for “white spaces” or areas with high impact potential where the market doesn’t appear to be addressing the needs of the people we would like to serve.
In such areas, our experience in working closely with our grantees/investees, paired with our sectoral research and diagnostic studies. It helps us identify the roots of a problem – and the likely disruptions that will catalyse a market-based model.
For example, in 2006, we wanted to better understand why microfinance institutions (MFIs) weren’t performing well in urban India vis rural India. Surface level analysis suggested that the issue was the lack of close ties among urban communities, which formed the very basis of group guarantees – a primary requirement for MFI lending.
However, upon delving deeper, our research brought forth the compelling and informative result that equally strong community ties existed in urban slums, and it was this insight that helped us dispel myths around performance of MFIs in urban areas. We then went on to invest in eight urban-focused MFIs, in most cases as the first institutional investor. Over time, we observed a ripple effect, taking the market share of MFIs in urban areas to a staggering 60 percent by 2016. Today, two of these MFIs, Ujjivan and Janalakshmi, are established small finance banks.
2. Impact is core to our mission.
From the pre-investment phase to the exit, creating measurable impact and delivering value to the customer ie. the families we serve – are our driving factors. For impact to be sustainable, it must be embedded in the business.
An example of this is our work with Avanti in the education space. College entrance exams are highly competitive and the preparation courses are often too expensive and have low adaptability for students from varied backgrounds; Avanti was created to bridge this important gap.
The Avanti Learning Centres scaled quickly from an assortment of free one-on-one mentoring into a for-profit company with standardised tools, technology, assessment materials and curriculum that delivered quality education at an accessible price. With impact as the driving force, success was evident when Avanti delivered classes at almost a quarter of the market price and 53 percent of Avanti’s students in 2018 were selected for the Joint Engineering Exams (JEE – Mains).
3. A sound foundation is built on sound financial discipline.
In making investment decisions, our objective is enabling large scale change for the families we serve. To achieve this goal, our investees need to have the ability to attract large and diverse pools of capital. The investment may initially seem high risk and unappealing to many investors, but after assessing the sustainability and scalability potential of a business that proposes to deliver high customer value, we are able to take informed risks on the basis of in-depth research and analysis of sectors and markets to which such business pertains.
Post-investment, we have a strong focus on customer value, organisational efficiency and growth to pressure test the success of the model to attract other pools of capital. As the investments mature and attract additional capital, we often realise that we need to take a back seat to enable the new investors to steer the way forward. This approach makes us reasonably disciplined in our exits as well.
While making exit decisions, we ensure that the business model can remain largely unchanged while it expands to deliver value to more customers from our target segment, and the buyer’s vision aligns with that of the company. Our exits have typically either come from new investors or by consolidation with larger entities, but our intent is always to ensure that the impact-driven business continues to sustain itself. Till date, we have not made a single exit where the core impact theory we supported, was discontinued by the new investors.
This approach is illustrated by not just our structured exits from our microfinance investments as described above, but also our well-performing exits in other areas such as micro-mortgages and credit for small social enterprises. In 2009, we invested in Micro Housing Finance Corporation, the first affordable housing finance company in India, which attracted commercial capital in 2013, and we exited the company in 2018.
4. Money alone doesn’t solve problems. People do.
We believe impact investment begins with capital but is dependent upon many other critical factors: talent, ideas, resources and a focus on execution. We fully support our entrepreneurs, as we believe that they are the key to the success of our partnerships. Throughout our investment journey, we have supported and nurtured our investees with relevant mentoring, talent and resources, including access to industry experts, assistance in research in beneficiary insights, an offer of professional support services “concierge” (including UI-UX expertise, marketing, communication, finance) and by facilitating cross learning between our portfolio organisations.
As we reflect on our learnings, we realise the need to stay our course – this work is too important for the many families living in poverty. In this blog series, we will share what has worked for us as impact investors, and what hasn’t, so others in the space can share in on our learnings. We hope to bring together our ideas, tools for scalability, investment principles and a template that can be the starting point for many impact investors going forward. This work is worth it, so stay tuned!